California Continues to Ramp up its Antitrust Regulation and Enforcement

As the antitrust landscape in the United States continues to evolve at the federal level, there have been increasing attempts by individual states to update and strengthen their own antitrust regulations. There have been efforts to increase fines, put in place new reporting requirements and target specific industries, such as healthcare and tech, for unique scrutiny in states like New York, Minnesota, Colorado and even conservative-leaning Texas, among others. And, not surprisingly, California is taking perhaps the boldest steps by considering an expansive overhaul of its antitrust law, the Cartwright Act. Most notable is a proposal to outlaw “anticompetitive exclusionary conduct,” a new legal term that has never been analysed or interpreted by any court. California is also considering a new regime that would allow the Attorney General to review, approve and block mergers and acquisitions, as well as a new definition of “antitrust standing” for use in lawsuits against technology companies. In addition, California has enacted two new laws aimed at ensuring that non-compete agreements in employment contracts become a relic of the past in California. And finally, the California Attorney General has vowed to dust off the criminal provisions of the Cartwright Act in order to criminally enforce California’s antitrust law for the first time in decades. With all of this happening in the Golden State, California’s antitrust landscape continues to tip towards regulation and enforcement under the belief that California – the fifth largest economy in the world – is unique and should operate under its own rules.

California is Considering Expansive Antitrust Reforms

The California Law Revision Commission (CLRC), the influential body that makes recommendations to the California legislature, is considering sweeping revisions of California’s antitrust law, the Cartwright Act. The CLRC is studying three main questions posed by the legislature. The first is whether California law should be revised to prohibit monopolies in a fashion similar to federal law, given that the Cartwright Act currently does not apply to unilateral conduct. The second question is whether the law should be revised with respect to technology companies so that the analysis of “antitrust injury” is far broader and may include consideration of all sorts of alleged harms, not just increased prices and diminished competition. And third, the CLRC is evaluating whether to propose revisions to the law that would empower the California Attorney General to “approve” (and presumably reject) mergers and acquisitions.

The CLRC is conducting its analysis through seven working groups, made up of volunteers, including antitrust professors, practicing attorneys and economists. Each group has been assigned a single issue to evaluate for the CLRC. For example, one working group is evaluating mergers and acquisitions. Another is considering whether the consumer welfare standard, by which most antitrust cases are judged, is the appropriate standard in California. Yet another group is doing an empirical study of the degree and effect of business concentration in California in order to make recommendations to the CLRC on that point.

All seven working groups have submitted reports to the CLRC. But only the “Single-Firm Conduct Working Group” actually proposed new statutory language to the CLRC. The legislative proposal preliminarily notes that it should be the policy of California “that the risk of under-enforcement of the antitrust laws is greater than the risk of over-enforcement,” which is contrary to federal antitrust policy. Then, after rejecting federal law’s prohibition on monopolisation as too narrow and Europe’s abuse of dominance standard as too ambiguous, the Single-Firm Conduct Working Group proposes that the legislature prohibit unilateral acts of “anticompetitive exclusionary conduct,” which is described as acts that may “diminish … the competitive constraints imposed by the defendant’s rivals and thereby increase … the defendant’s market power, and … does not provide sufficient benefits to prevent the defendant’s trading partners from being harmed by that increased market power.” Yet there is no requirement for a defendant to be a certain size (ie, a monopolist), there is no definition of how much of an increase in market power is problematic, there is no carve out for transitory increases in market power, and there is no requirement for the definition of a relevant antitrust market, which is necessary in order to judge any alleged increase in market share and is required under federal law. In a nod to the plaintiffs’ bar, the proposal states that “[p]laintiffs need not show that the rivals whose ability to compete has been reduced are as efficient, or nearly as efficient, as the defendant.” Finally, the legislative proposal makes clear that all federal doctrines that make it more difficult to prove that unilateral conduct is anticompetitive under federal law, should not be applicable to the new California law.

Critics have asserted that, if adopted into law, the Single-Firm Conduct Working Group’s legislative proposal is likely to chill competition and innovation, may subject even small companies to significant liability and will certainly make it more difficult to do business in California. Detractors also say that the proposal is so broad that it could be read to prohibit many efforts to increase market share in California, even by cutting costs, dropping prices or introducing a better product or service. Moreover, opponents claim that the draft legislation does not offer any means for courts to distinguish between anticompetitive exclusionary conduct and competition on the merits that weakens rivals, the latter, of course, being the essence of competition.

Another critique of the Single-Firm Conduct Working Group’s legislative proposal is that it fails to demonstrate a need for revising the Cartwright Act and it provides no economic analysis of the likely impact of such revisions. Opponents assert that while the legislative proposal claims that “[t]he most glaring deficiency in the Cartwright Act is its failure to reach purely unilateral conduct,” the proposal does not explain how this “glaring deficiency” has negatively impacted Californians through higher prices, inferior products or services, less competition or any other measure. Moreover, opponents have pointed out that there is no economic analysis of how the legislative proposal would impact competition in California, California workers, the willingness of businesses to operate in California or California’s tax base. According to these detractors, passing statutory revisions in a vacuum or based on anecdotal and unsupported beliefs that competition in California is not as robust as it could be is bad for California businesses and ultimately California consumers.

The CLRC will hold hearings throughout 2024 and could submit proposed legislation to the California Legislature by early 2025, based on its analysis and public comment. 

California Bans Non-Compete Agreements (Again)

For decades, agreements between employers and employees that prevented employees from working for competing businesses have generally been void in California (Cal. Bus. and Prof. Code § 16600). The only exceptions to this rule are non-competes that are reasonable in terms of time, activity and territory and that relate to the sale of a business or protect legitimate trade secrets. These rules are rooted in the idea that promoting employee mobility in California spurs competition, innovation and economic growth.

Two new California laws, effective 1 January 2024, only reinforce California’s commitment to banning non-compete agreements between employers and employees. The first law makes it expressly unlawful for employers to use post-employment, non-compete provisions in agreements with employees. Prior to passage of this law, non-competes in employee agreements were simply unenforceable, as opposed to being actively illegal. Violation of this law can subject employers to injunctive relief, actual damages, or both, along with an order to pay an employee’s attorneys’ fees and costs on a successful challenge. The second law requires employers who entered into non-competes with employees since January 2022 to notify those employees that those agreements are void and unenforceable, regardless of whether the agreement was executed inside or outside of California. Failure to provide such notice constitutes unfair competition and can result in fines.

Certain gray areas in these new laws, as well as the California court’s broad application of the ban on employee non-competes and narrow application of exceptions, will almost surely lead to increased scrutiny and litigation in this area. There is also growing uncertainty among employers on how to deal with employees jumping ship to work with competitors, particularly those employees privy to trade secrets and confidential customer information.

California’s Attorney General Promises to Bring Criminal Cartwright Act Cases

For more than a century, California’s Cartwright Act has expressly authorised the California Attorney General to bring criminal prosecutions of companies and individuals involved in conspiracies and agreements that unreasonably restrain trade. Violation of the Cartwright Act carries with it the possibility of significant criminal penalties against both corporations and individuals, including large fines and up to three years of prison time. Historically, the California Attorney General brought criminal prosecutions of the Cartwright Act focused on bid-rigging and other types of collusive conduct affecting state and local government contracts. For decades, however, these criminal provisions of the Cartwright Act have not been invoked by the Attorney General, which has focused instead on civil proceedings as its primary means of antitrust enforcement.

But in a significant shift in enforcement strategies, in early-2024, California Assistant Attorney General Paula Blizzard announced that, for the first time in 25 years, California is “reinvigorating criminal prosecutions under the Cartwright Act.” Blizzard made a point of noting that the Cartwright Act allows for imprisonment in county jail, which can be less agreeable than state or federal prisons, calling that fact “probably the biggest deterrent that I have.”

Blizzard’s promise of aggressive criminal antitrust enforcement is not surprising. But it does raise a number of questions about what types of cases the Attorney General may single out for criminal prosecution and whether there will be interplay with the federal government’s criminal prosecutions under the federal Sherman Act.

In terms of the types of cases that may be brought, the Attorney General has repeatedly emphasised the importance of employee mobility and compliance with the new California statutes outlawing employee non-compete agreements. Thus, it is possible that the Attorney General will target for criminal treatment employers that, despite new California law, regularly use non-compete provisions in their employee agreements. Another candidate for criminal prosecution is collusion impacting state and local government procurement of the type the Attorney General criminally prosecuted in the 1990s.

In terms of how California criminal enforcement will coexist with federal enforcement, much remains to be seen. Since 2006, a protocol for the federal government to transfer prosecutorial responsibility to a state attorney general for local or regional antitrust crimes has been in place, but the protocol has never been used, calling into question how California and federal enforcers may cooperate with one another in future prosecutions. Additional complications arise from the fact that some types of conduct are evaluated under more stringent standards in California than in federal courts. For instance, resale price maintenance (agreements between manufacturers and distributors on the prices distributors will charge) and tying arrangements (agreements by a party to sell one product, but only on the condition that the buyer also purchases a different product) are both viewed as unlawful per se by California courts, but are treated less harshly under federal law. That is, some conduct may be a criminal violation of California law, but not a criminal, or even civil, violation of federal law, which will only hamper cooperation between state and federal prosecutors.

What’s Next in California?

California is increasing its antitrust enforcement efforts in collaboration with the federal government and other states. But California is also not afraid to go it alone, as it has in seeking to overhaul its own antitrust statute, enacting legislation affirmatively banning non-compete agreements with employees and seeking to criminally enforce California’s antitrust laws. All of these efforts are likely to be tested and challenged in the courts and the Legislature, but there are no signs of California standing down from its efforts to regulate, punish and deter what it views as anticompetitive conduct.